The ROI of Contract Management – Part One
One of the most common questions I receive is from people struggling to demonstrate the value of contract management or, more specifically, the return that might be achieved from investment (for example in contract management software).
There tend to be three different, but linked, scenarios leading to these questions. In one, the contract management function is struggling to explain or justify its existence; in the second, there are efforts to justify added headcount or centralization of existing resources; in the third, there is resistance to investment in automation due to the lack of any compelling business case.
In my experience, there is a common problem in all three of these situations – the return on investment (ROI) is being sought in the wrong place.
Most contract management groups lack meaningful data to support the value of their business contribution. Their work involves coordination, support, oversight, reporting – not the types of activity that easily lend themselves to clear measurements. As a result, they tend to claim value based on risks avoided (“terrible things would happen if we weren’t here”), or the volume of contracts handled, or compliance rates achieved (neither of which necessarily represents a benefit). A few offer more tangible measurements, such as incremental revenues, margin or savings achieved during negotiation or in post-award management.
For those proposing automation, the issues are similar (little base data), but supplemented by the fact that any direct savings from new systems are typically small. The volume of full-time resources allocated to contract management is simply not enough to generate meaningful headcount reductions. This problem is compounded by the fact that software adoption levels are often low because many of the systems currently available are not suited to the environment in which they are being installed.
These issues arise from a common misunderstanding – that is, a fundamental failure to appreciate the true source of contract management value. This misunderstanding goes back almost 20 years, to the time when analysts first started to take an interest in contract management and its automation. Their limited experience (primarily in sectors such as retail) led them to think of contract management as essentially an administrative function, primarily focused on procurement of goods. In such environments, the purpose of automation is focused on internal efficiency, supplemented by the possibility of savings from reduced errors (e.g. failing to spot a renewal or expiry date) or compliance (ensuring use of standard terms).
This thinking has permeated through into the wider view of contract management and, as recent IACCM research reveals, has resulted in the discipline failing to adjust to the needs of today’s business. Only one in six people are satisfied with the contracting process and the way it supports their personal performance – so there is an enormous opportunity to drive improvements.
In Part 2 of this blog, I will provide more details about the research and suggest where the true source of contract management value can be found.